The Red and Blue partnership hasbeen created to operate a law firm. The partners have been attempting to devisea fair system to allocate profits and losses. Red plans to work more billablehours each year than Blue. However, Blue has more experience and can charge ahigher hourly rate. Red expects to invest more money in the business than Blue.

Build a spreadsheet that can be usedto allocate profits and losses to these two partners each year. The spreadsheetshould be constructed so that the following variables can be entered:

• Net income for the year.
  

• Number of billable hours for each partner.
  

• Hourly rate for each partner.
  

• Capital investment by each partner.
  

• Interest rate on capital investment.
  

• Profit and loss ratio.
  

Use this spreadsheet to determinethe allocation if partnership net income for the current year is $200,000, thenumber of billable hours is 2,000 for Red and 1,500 for Blue, the hourly ratefor Red is $20 and for Blue is $30, and investment by Red is $80,000 and byBlue is $50,000. Interest on capital will be accrued each year at 10 percent ofthe beginning balance. Any remaining income amount will be split 50–50.

Use the spreadsheet a second timebut make these changes: Blue reports 1,700 billable hours, Red invests$100,000, and interest will be recognized at a 12 percent annual rate. How dothese three changes impact the allocation of the $200,000?

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